THE INDIAN PARTNERSHIP ACT

DEFINITION OF PARTNERSHIP Section 4 of the Indian Partnership Act, 1932 defines Partnership as Partnership is a relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all. A contract of Partnership is a special type of contract. The persons entering into the contract are called Partners and the collectively are called a Firm. ESSENTIALS / CHARACTERISTICS OF PARTNERSHIP From the above definition the following can be drawn as essentials or characteristics of a Partnership Firm. 1. Association of two or more persons :- There must be atleast two persons to form a partnership. The maximum no. of persons in a partnership is not provided in the Partnership Act but Section 11 of the Companies Act, 1956 provides for the same. Accordingly, if the partnership firm is engaged in a banking business the maximum number of partners permissible is 10 and in case the partnership firm is in any other business the maximum number of partners permissible is 20. 2. Presence of a Contract:- There is a contractual relationship between the partners. Therefore there must be a agreement between the partners. The agreement may be express or implied. This agreement must fulfil all the essentials of a valid contract under the Indian Contract Act. 3. To conduct Business :- The idea of few persons coming together and doing some activity for charitable purpose cannot be termed as partnership. The intention to conduct business is essential for the partnership. The term business is defined in Section 2(b) as business includes every trade, occupation and prof ession. The word business generally covers the intention of doing transactions to achieve some goal. 4. Sharing of profits :- The purpose of partnership should be to earn profits. The term profit means net profit. Sharing of profits is essential ingredient of any partnership. There must be an agreement between the partners to share profits and losses. 5. Essentials of Contract :- The partnership must fulfil essentials of contract as it is a contract between partners. 6. Mutual Agency :- The most fundamental characteristics of partnership is that the business must be carries on by all or any of them acting for all. Each partner is an agent of other partner or partners. Partners bind each other by their acts. Each partner is a principle as in he/she is liable for the acts of the other partner. Section 18 of the Partnership Act says that a partner is the agent of the firm for the purposes of the business of the firm.

TEST OF DETERMINING THE EXISTENCE OF PARTNERSHIP Section 6 of the Partnership Act, specifies that in determining whether a group of persons is or is not a firm, or whether a person, is or is not a partner in a firm, regard shall be had to the real relation between the parties shown by all relevant facts taken together. The intention of the partners will have to be decided with reference to the terms of the agreement and all the surrounding circumstances. Therefore, to determine whether there is partnership following tests can be undertaken: Sharing of profits: - Sharing of profits is the essence of any partnership. There must be an agreement between partners to sabre profits or losses. If such agreement does exist then we can say there is partnership. Mutual Agency: - It is most fundamental feature of partnership. Partners are agents of each other and principals for themselves. If there is such mutual agency among group of persons, we can say there is existence of partnership. Intension of the parties: - The intention of the partners will have to be decided with reference to the terms of the agreement and all the surrounding circumstances. In Cox Vs. Hickman it was held that the receipt by a person of a share in the profit is a prima-facie evidence that he is a partner but this is not a conclusive test the question whether a person is a partner or not therefore depends in all cases upon whether or not he has the authority to act for other partners and whether or not the other partners have the authorities to act for him. Thus a partners assumes a dual role; (a) he is an agent of the firm with regards to third parties and can thus bind the firm by his acts. (b) he is principal in respect of the act of the other partners. DISTINGUISH BETWEEN PARTNERSHIP AND HINDU UNDIVIDED FAMILY. PARTNERSHIP 1. Agreement It can arise only by an agreement of the Partners. HINDU UNDIVIDED FAMILY It arises by operation of law. It cannot be created by an agreement of the members. 2. Admission of interest A new partner can be admitted in the Partnership, only with the consent of all the Partners. 3. Acquisition of Interest 4. Number A partner acquires interest in the business only by an agreement. There is a statutory limit on maximum number of Partners i.e. 10 in case of a firm carrying on banking business and 20 in any other business. 5. Minor A minor cannot become a full 2 A male minor is the full-fledged A person acquires interest in the business by birth in the family. There is no statutory limit on maximum number of members. A person becomes the member only by birth in the family.

Members

fledged partner. He can only be admitted to the benefits of partnership with the consent of all the partners.

member. He becomes member merely by birth in the family.

6. Mutual Agency

There is a relationship of agency between the partner i.e. all the partners are mutual agents.

There is no such agency relationship between all the members of the family. The Karta (i.e. manager) of the family is the only representative of the family.

7. Implied Authority

Every Partner has an implied authority to bind the firm by his acts done in the ordinary course of the business.

Only the Karta has an implied authority to bind the family by his acts. Other members of the family do not have such authority.

8. Liability

A Partner is personally liable for the business obligations of the firm. The share of each partner in the partnership property and profits alongwith his private property is liable for the discharge of debts of the partnership.

A member is not personally liable for the business obligations of the family. Only his share of property and profits in the family is liable for the discharge of the debts of the family. However, the karta is personally liable for the business obligations of the family. It is not dissolved on the death or insolvency of any member.

9.

Effect of Death/ Insolvency

It is dissolved on the death or insolvency of any one partner.

10. Right to demand accounts

A Partner has right to demand inspect and copy any accounts of the firm. Moreover, he also has the right to demand the dissolution of the firm.

A member has no right to ask for accounts of the past dealings of the family. There is no concept of dissolution of the family.

11. Dissolution

A partner has right to demand for dissolution.

A member has right to demand the partition of the joint family property.

12. Registration

Registration is not optional but the unregistered firm suffers certain disabilities.

There is no concept of registration of Hindu Undivided family.

DISTINGUISH BETWEEN PARTNERSHIP AND COMPANY. PARTNERSHIP 1. Definition Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all 2. A Legal Person 3. Liability In a Partnership, the liability of partners is unlimited A firm is not a legal Entity A Company on the other hand , is a Legal Person In case of a company, which is limited, the liability of the members is limited to the extent of its share capital 4. Transfer of Shares In a firm, a partner cannot transfer or assign the whole of his share without the consent of all the partners of the firm 5. Mutual Agents 6. Registration In a firm, all partners are mutual agents Registration of a firm is not compulsory under the Partnership Act, 1932 7. Management Management vests in the hands of the Partners except in the case of Sleeping Partners 8. Creditors Creditors of firm are also creditors of the partners individually as well 9. Statutory obligations 10. Accounts A partnership has less statutory obligations Accounts of a partnership firm need not be audited by the auditor 11. To whom property belong The property of affirm belongs collectively to the partners The property of a company, on the other hand, belongs to the company, and not to the shareholders In a company, a shareholder can transfer his share subject to the provisions of the Articles of the Company In a company, a member is not an agent of the other member Registration of a company is compulsory under the Companies Act, 1956 Management vests in the board of Directors, elected periodically by the shareholders Creditors are only the creditors of the company and not of the individual shareholders A company is strictly regulated under the Companies Act, 1956 Accounts of a company must be audited by an auditor COMPANY A Company means a company formed and registered under this Act or an exiting Company.

12. Effect of death of partners and members 13. Contract with the firm or company

In the case of a firm, death or insolvency of a partner resolution the dissolution of the firm, unless there is a contract to the contrary A Partner cannot enter into a contract with the firm, in which he is a partner, because the firm is not a legal person

In the case of a company, death or insolvency of a member of the company does not result in the dissolution of the company A shareholder, on the other hand, can enter into a contract with the company, of which he is a member, because the company is a legal person

14. Power to dispose of property 15. Effect of Restrictions on authority

A partner can dispose of the property of the firm

A Shareholder cannot dispose of the property of the company

In a partnership firm, when restrictions are imposed on the authority of a partner, they are of no avail against third person who has no knowledge of it

In the case of a company, the restrictions of a company are absolutely valid, because the memorandum and articles of company serve as a public notice In the case of a company, a Private Company : Minimum 2 and Maximum 50 and in case of Public Company : Minimum 7 and Maximum unlimited

16. Limit on number of members

In the case of a firm, the number of partners must not exceed 10 for carrying on banking business and 20 for any other business

DISTINGUISH BETWEEN PARTNERSHIP AND CO-OWNERSHIP. PARTNERSHIP 1. Contract Formation of contract is essential for this 2. Profit Sharing It involves sharing of profit CO-OWNERSHIP It is not necessarily result of the agreement It does not necessarily involves sharing of profit 3. Transfer of Interest A partner cannot transfer his interest in partnership without the consent of other partners 4. Agent A partner is real or apparent agent of other partners 5. Lien A partner has lien on common goods 6. Purpose The purpose of partnership A co-owner can transfer his interest in property, without consent of others A co-owner is not agent of other co-owners A co-owner has no lien on the things owned in common Co-ownership does not

business is sharing of gain

necessarily exist for the sake of gain

7. Limit on Number 8. Business

There is a maximum limit on number of partners It must involves carrying of a business

There is no maximum limit It does not necessarily involves

carrying of a business

9. Partition

A partner has no right to demand partition of business in specie and he can only sue his copartners for the dissolution of the firm and accounts

A co-owner is entitled to demand

Partition of joint property in specie

PARTNERS, FIRM, FIRM NAME AND PARTNERSHIP According to section 4 of the Act "Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm name". For example, A & B entered into a partnership bu siness of manufacturing bags under the name A & B Bags. Individually A & B are partners, together they are firm and A & B Bags is the firm name. The relationship between A & B is partnership. TYPES OF PARTNERSHIP The following are the different types of Partnership: i. Partnership for a fixed Term Where Partners have agreed to carry on the business for a definite period of time, the partnership is said to be for a fixed period. It shall come to an end only after the expiry of the stipulated period. Where the partners continue the business even after the stipulated time the partnership gets converted into a partnership at-will. ii. Particular Partnership Where two or more persons agree to do a business in a particular adventure or undertaking such a partnership is called a particular partnership. For example : A and B enter into a partnership for producing of film. iii. Partnership-at-will when no provision is made by the contract between the partners for the duration of the partnership or for the determination of the partnership, the partnership is called partnership-at-will. The partnership-at-will has no fixed or definite date of termination and therefore death or retirement of any of the partner does not affect the existence of the partnership. A partnership-at-will can be dissolved by any partner by giving notice in writing to all the remaining partners about the intention of such dissolution. 6

TYPES OF PARTNERS The different types of Partners are : i. Active Partner A person who is actively, actually or effectively engaged in the conduct of business of the partnership firm is known as an Active Partner. He is the agent of the other partners and has authority to bind the firm and the other partners in the ordinary course of business. ii. Sleeping or Dormant Partner A sleeping partner is one who does not take and active part in the conduct of business of the firm. He invests capital and share the profits of the firm and is also equally liable along with other partners for all the liabilities of the firm. iii. Nominal Partner A person who lends his name to the firm, without having any real interest in it is called a Nominal Partner. He does not invest any capital in the business nor does he takes any active part in the business nor does he share any profit of the firm. However he is liable along with othe r partners for all the liabilities of the firm. iv. Partner in Profit only Where a partner agrees with the other partners that he shall share only profits and shall not be liable for any losses of the firm he is called Partner in Profit only. However he remains liable to the creditors for the debts of the firm since under the Partnership Act the liabilities of the partners is joint, several and unlimited. v. Sub-Partner Where a partner agrees to share his profits earned form the firm with a third person then that third person is known as the sub-partner. A sub-partner has no rights against the firm and cannot represent himself as a partner of the firm. He is in no way connected with the firm and is thus not liable for the liabilities of the firm. vi. Partner by Estoppel or by Holding Out - Sometimes strangers represents themselves to be partners in a firm and thereby induce third parties to give credits to the firm such strangers are called as partners by Estoppel or Partners by Holding Out. Section 28 of the Partnership Act prescribes that a person be liable as a partner by Holding out must fulfill the following condition: y he must have by words, written or spoken or by his conduct, represented himself to be a partner or y he must have knowingly permitted himself to be represented as a partner to the other person and y the other person must have acted on the faith of such representation and have given credit to the firm. vii. Minor Partner As per Section 11 of the Indian Contract Act, 1872 a minor

cannot enter into an agreement. However Section 30 of the Partnership Act provides

that with the consent of all the partners for the time being a minor may be admitted to the benefits of Partnership. REGISTRATION OF PARTNERSHIP FIRM The Indian Partnership Act does not make registration of a firm compulsory nor does it impose any penalty for non registration. It is optional for the firm to get itself registered or not. However, Section 69 puts down certain disabilities to a non registe red firm which normally forces the partners the partners to get the firm registered. The effects of non registration are as follows: 1. No suit by a partner against other partners or firm a partner of a unregistered firm cannot sue the firm or any partner of the firm to enforce a right arising from the contract or conferred by the Partnership Act. He can do so only if the firm is registered and the person suing is shown as a partner in the register of firms. 2. No suit against any third party an unregistered firm cannot sue a third party to enforce a right arising from a contract. The firm can only do so if the firm is registered and the person suing is shown as a partner in the register of firms. 3. No right to counter claim or to claim setoff an unregistered firm or any partner thereof cannot claim setoff in the proceedings instituted against a firm by a third party to enforce a right arising from a contract. Setoff means a claim by the firm which would reduce the amount of money payable to the claimant. 4. Arbitration proceedings in Jagdish Chandra Gupta Vs. Kajaria Traders (India) Limited it was held that arbitration proceedings were barred if the firm was unregistered. Non registration of the firm however, does not affect the following rights: (i) The right of a third party to sue the unregistered firm or its partners. (ii) The right of a partner to sue for dissolution of a firm or for accounts of a dissolved firm or any right to realise the property of the dissolved firm. (iii) The Power of a official assignee or court receiver to realise the property of an insolvent partner. (iv) The right of a firm or partners of a firm having no place of business in India. (v) The right of a unregistered firm to enforce a right arising otherwise then out of a contract. (vi) One partner can bring a suit for damages for misconduct against the other partner. (vii) The right to claim Setoff in a suit for an amount not exceeding Rs.100/ - in value. RIGHTS OF PARTNERS The Rights of a partner are as under: 1. To take active part in the business Every partner has a right to take active part in the conduct and management of the business of the firm.

2.

To share Profits Every partner has a right to share profits earned and are liable to contribute to the losses incurred by the firm.

3.

To be consulted - Every partner has a right to be consulted in all matters affecting the business of the partnership firm before any decision is been taken. In case of difference of opinion it may be settled by decision of majority of the partners.

4.

To have access to the accounts - Every partner has a right to have access, inspect and copy the books of accounts of the firm.

5.

To be indemnified - Every partner has a right to be indemnified for the expenses incurred or payments made in the ordinary course of business.

6.

To use the property of the firm - Every partner has a right to use the property of the firm for the purposes of the business of the firm. If the partner uses the firms property of the private purpose then he is liable to compensate the firm for the same.

7.

Interest on capital - Every partner has a right to receive interest on capital at a certain rate as may be specified and agreed in the partnership agreement. Such interest is payable only out of profits, in any, earned by the firm.

8.

Interest on loan - Every partner has a right to receive interest on loan at the rate of 6% p.a. on any loans or advance payments made by him beyond the capital. Such interest is payable not only out of the profits but also from the assets of the firm.

9.

To act as agent of the firm - Every partner has a right to act as the agent of the firm and to bind the firm and other partners for acts done by him in ordinary course of business.

10.

To retire A partner has a right to retire (a) with the consent of all the other partners, or (b) in accordance with the express agreement between the partners or (c) in case of Partnership-at-will by giving notice to all the other partners of his intention to retire.

DUTIES AND LIABILITIES OF PARTNERS The duties of a partner are as under : 1. To carry on the business to the common advantage Every partner is bound toa) Carry on the business of the firm to the greatest common advantage. b) To be just and faithful to each other in the mutual dealings. c) To use reasonable care and skill in the performance of his duties and d) Render true accounts and full information of all things, affecting the firm, to any partner or his legal representative. 2. To indemnify Every partner is bound to indemnify the firm a) For any loss cause to it by his fraud in the conduct of business of the firm. b) For any loss incurred due to his willful neglect in the conduct of the business of the firm.

3.

To attend diligently to his duties Every partner is bound to attend diligently to his duties in the conduct of the business of the firm. He must use his knowledge and skill for the benefit of the firm.

4.

To account for private profits If a partner derives any benefit, without the consent of the other partners from any transactions of the firm or from any use of the partnership property, name or business connection. He must account for it and compensate it to the firm. There exists a fiduciary relationship between partners and therefore no partner is entitled to make any personal profit.

5.

To account for profit in competing business A partner must not carry a business as of competing nature with the firm. If he does that then he is bound to account for and compensate to the firm all the profits made by him in that competing business.

6.

To act within authority Every partner is bound to act within the scope of his actual or implied authority.

7.

To hold and use the property of the firm exclusively for firms business Every partner is bound to hold and use the property of the firm exclusively for the purposes of the business of the firm.

8.

Not to assign his rights A partner cannot assign rights and interest in the firm to an outsider so as to make him the partner of the firm. He can, however, assign his share of the profit and share in the assets of the firm.

9.

To be liable jointly and severally Every partner is liable jointly with all the other partners and also severally for all the acts of the firms done during the period he is the partner.

MUTUAL RIGHTS AND DUTIES OF PARTNERS (SECTION 17) 1. After a change in the firm Where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be; 2. After the expiry of the term of the firm - Where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will; and 3. Where additional undertakings are carried out Where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings, are the same as those in respect of the original adventures or undertakings. PARTNERSHIP PROPERTY Property of the firm is taken to mean the joint property of all the partners. The Partners in fact by an agreement amongst themselves may determine, what constitutes the 10

property of the firm. In the absence of such agreement, the following shall constitute the property of the firm. 1. Property Originally brought in by the firm Any property which is brought by the partners, at the commencement of the partnership and put into joint stock of the firm. 2. Property acquired afterwards Any property which is acquired by or for the firm, after the commencement of the partnership is the property of the firm. 3. Partners personal property in the firms use Where the personal property of a partner is used in the business of the firm, it depends upon the intention of the parties whether it has become the property of the firm or not. Example: A partners personal car is been used exclusively for firms purpose, the car becomes the property of the firm and the partner becomes creditor for that amount. 4. Conversion of joint properties into separate property Where a property is bought wi th the money of the firm, but in the name and for the exclusive benefit of a partner, the partner becomes a debtor to the firm for the purchase money; and the property becomes the personal property of the partner. Similarly, where a part of the joint properties is allotted to a partner, on the dissolution of a firm, it becomes his separate, personal property. Example: Car bought of the joint fund of the firm is used by A, a partner for private use only. The car should become the property of A and he becomes a debtor to the firm for the car amount. 5. Goodwill The term goodwill has been not been defined in the act. It means every advantage and good representation and reputation which the firm has acquired while carrying out its business. Goodwill is the property of the firm and it can be sold either separately or along with the other property of the firm. Hence goodwill is the part of the property of the firm. CONTENTS OF THE PARTNERSHIP DEED A Partnership Deed contains elaborate provisions on almost all aspects of a partnership business. If the partnership deed does not contain any specific condition on any issue, it will be decided according to the provisions of the Partnership Act. Following is the list of major items mentioned in a partnership deed. a) b) c) d) e) f) Name address of the partnership business Names and addresses of partners Nature of partnership business Profit or loss sharing arrangement Duties and responsibilities of each partner in conducting the business Method of accounting, auditing etc. 11

g) h) i) j) k) l)

Conditions regarding maintenance of bank account. Conditions regarding drawings Conditions regarding interest on capital, interest on drawings etc. Whether, or not salary is allowed to partners, conditions regarding salary. Conditions regarding loans from partners, loan s to partners Valuation and presentation of goodwill

m) Procedures for settlement of accounts in the event of retirement or death of a partner. n) Arbitration clause, to settle disagreement if any.

AUTHORITY OF PARTNERS An agent who acts within the scope of authority conferred by her principal binds the principle in the obligations she creates against third parties. Each partner is principle as well as agent of other partners. It means each partner has the authority to bind the firm by his own acts. Authority may be express or implied. Express authority means partners have been expressly told partner may act on behalf of a firm. It may be in spoken or written words. The act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. This authority is implied authority of partners. [Section 19(1)] The word implied authority denotes the authority to bind the firm which arises by implication of law from the fact of partnership. With the presence of implied authority, a partner binds the firm with any of his act done in connection with the business. The partner may bind the firm for the following acts: y The partner may buy or sell goods and usually buy those goods concerning the firm. y He may appoint servant for the conduct of the business. y He may accept payment for a debt on behalf of the firm and issue a valid receipt. y He may pledge or sell the property of the firm for the interest of business. y He may raise loan on security of the goods of the firm. Implied authority covers those acts of partners which fulfil the following three conditions: y The act must relate to the normal business of the firm. y The act must have done in the usual way of carrying on the business of the firm . y The act must be done in the firms name or in any other manner expressing or implying an intention to bind the firm. For instance, if it is usual to give credit to customers in a particular business, the giving of credit by a partner to a customer will bind the firm. However, if a usual act is done in an unusual manner, this must raise a suspicion as to the authority of a partner and the protection on the ground of implied authority may not be available. Section 19 (2) states that i n the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to 12

a) submit a dispute relating to the business of the firm to arbitration, b) open a banking account on behalf of the firm in his own name, c) compromise or relinquish any claim or portion of a claim by the firm, d) withdraw a suit or proceeding filed on behalf of the firm, e) admit any liability in a suit or proceeding against the firm, f) acquire immoveable property on behalf of the firm, g) transfer immoveable property belonging to the firm, or h) enter into partnership on behalf of the firm. In addition, the partners in a firm may by a contract restrict the implied authority of any partner. However, the outsider shall not be bound by such restrictions unless he otherwise knows of any such private contracts between the partners. For example - A and B carry on business in partnership as bankers. A sum of money is received by A on behalf the firm. B does not know of the receipt. A appropriate the money to his own use. The partnership is liable to make good the money. This is an act done by a partner in the usual course of business. Therefore the firm is liable. LIABILITY OF PARTNERS AND THE FIRM TO A THIRD PARTY Liability of partners for acts of the firm: - Every partner is liable for the acts of the firm. The liability of partners is joint and several. Liability of the firm for the wrongful acts of a partner: - The firm is liable for the loss caused to the third party on account of wrongful acts or omission done by a partner in the ordinary course of business or authority of all other partners. Examples, A & B are partners. B bribed the clerk of C to get confidential information. The clerk leaked the information resulting loss to C. Here the firm is liable. Liability of the firm for misapplication by partners: - Any money or property, from s third party is received by a partner in the exercise of his authority or received by the firm in the ordinary course, if misapplied by a partner, the firm shall be liable. Example: A, B & C are partners. D, a customer places a order worth Rs. 20,000 and pays advance to A. A uses the money for buying a TV for personal use. Here, D is liable only to pay the balance amount of Rs. 10,000 on supply of goods. PARTNER BY HOLDING OUT Sometimes strangers represents themselves to be partners in a firm and thereby induce third parties to give credits to the firm such strangers are called as Partners by Estoppel or Partners by Holding Out. Section 28 of the Partnership Act prescribes that a person be liable as a partner by Holding out must fulfill the following condition: a) he must have by words, written or spoken or by his conduct, represented himself to be a partner or b) he must have knowingly permitted himself to be represented as a partner to the other person and 13

c) the other person must have acted on the faith of such representation and have given credit to the firm. It is immaterial whether the person making representation does or does not know the representation has reached the other person. The commonest example of partner by holding out arises where the partner has retired from a firm and no public notice has been issued regarding his retirement and the continuing partner still use his name as a partner on firms letter heads and other documents. He will be personally liable to the creditors who have acted on the faith of he being a partner. Section 28 (2) further specifies that the doctrine of holding out does not extend to bind the estate of the deceased partner, where after partners death, the business of the firm is continued in the old firms name. It does not apply where a partner has been adjudicated as an insolvent. After attaining majority and before giving public notice, a person may be held liable for holding himself as a partner. THE POSITION OF A MINOR IN A PARTNERSHIP FIRM. Minor Partner As per Section 11 of the Indian Contract Act, 1872 a minor cannot enter into an agreement. However Section 30 of the Partnership Act provides that with the consent of all the partners for the time being a minor ma y be admitted to the benefits of Partnership. This provision is based on the rule that a minor cannot be a promisor but he can be a promisee or a beneficiary. Rights of a Minor before attending the age of Majority (i) He has a right to share the profits and the property of the firm as may be agreed. (ii) He has a right to have access to and inspect the books of accounts of the firm. (iii) Right to sue for payments of his share of profit or property in case of his severance of connection with the firm. (iv) He has a right to elect to become a partner on attaining the age of Majority. (v) He has a right to elect not to become a partner on attaining the age of Majority. Liabilities of a Minor before attending the age of Majority. (i) A minors share is liable for the acts of the firm. (ii) He is not personally liable for sharing any liabilities or losses of the firm in his personal capacity nor is his personal property liable. Position of the Minor on Attending the age of Majority On attending Majority the minor partner has to decide within six month whether he want to continue as partner in the firm or discontinue as a partner from the firm. The period of six months start from the date of his majority or from the date when he first comes to know that he has been admitted to the benefits of the partnership, whichever is later.

14

Within the said period of six months he should give a public notice of his choice whether to continue as a partner or not to continue as a partner. If he fails to give a public notice he is deemed to have become a partner in the firm on the expiry of the said six month. Position of a minor if he elects to become the Partner after attending the age of Majority. (i) He becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of the partnership. (ii) His share to the profits of the firm is the same as he was entitled to as a minor partner. Position of a minor if he elects not to become the Partner after attending the age of Majority. (i) His rights and liabilities of the partner as a minor continue up to the date of the notice. (ii) His share is not liable for any acts of the firm done after the date of the public notice. (iii) He is entitled to sue the partners for his share of the profits and property of the firm. DISSOLUTION OF A FIRM. Dissolution of firm means a firm ceases to exist. The relation existing between the partners discontinues. The whole firm is dissolved and the partnership terminates. The dissolution of partnership between all the partners of a firm is called the dissolution of the firm (Section 39). Modes of Dissolution: A firm may be dissolved in any of the following modes:1. 2. 3. Voluntary dissolution Dissolution by operation of law Dissolution by the intervention of the court

1. Voluntary dissolution:A. By Consent:- A partnership firm can be dissolved any time with the consent of all the partners whether the partnership is at will or for a fixed duration. B. By Agreement:- A partnership can be dissolved in accordance with the terms of the Partnership Deed or of the separate agreement. C. Dissolution By Notice:- In case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other partners duly signed by him. 2. Dissolution by operation of law This is further divided in to: A. Compulsory Dissolution B. Dissolution on the happening of contingent event 15

A. Compulsory Dissolution:In case, any of the following events take place then it becomes compulsory for the firm to dissolute:i. Insolvency of Partners: - In case all the partners or all the partners except one become insolvent. ii. Unlawful Business: - In case the firms business become unlawful on the happening of a subsequent event. E.g. trading with alien country. B. Dissolution on the happening of contingent event A firm may be dissolved on the happening of any of the following contingent event: i. Expiry of Fixed Period:- If the firm is constituted for fixed period, then the firm is dissolves automatically. ii. On achievement of specific task:- If the firm has been constituted for the achievement of specific task, on achievement of that task, firm ceases to exist. iii. Death of Partner:- Death of any of the partner dissolves the partnership. iv. Insolvency of Partner:- The insolvency of any of the partner may dissolve the firm. v. Resignation of Partner:- Resignation by any of the partners dissolves the partnership. 3. Dissolution by the intervention of the court The court may order for the dissolution of the firm on the foll owing grounds: A. Insanity of Partner:- On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind. B. Incapacity of Partner:- If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner. C. Misconduct of Partner:- If any partner other than partner suing is responsible for any loss to the firm, then the court may order for the dissolution of the firm. D. Constant breach of agreement by partner:- The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement and it becomes impossible to continue the bu siness with such partner. E. Transfer of Interest:- When any of the partner other than the suing partner transfers whole of its share to the third party for permanently. F. Continuous Losses:- The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the future growth of the firm. G. Just and Equitable:- The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g. loss of total confidence between the partners. The rights of a partner on dissolution of a firm are as under:

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(i) Right to an equitable lien Under Section 46 every partner is entitled to have the property of the firm applied in payment of outside debts and liabilities of the firm and to have the surplus distributed among the partners in accordance with their rights. Such a right of a partner is called as equitable lien of partners. (ii) Right of partners to have the business wound up The authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue to wind up the affairs of the firm (Section 4 7). (iii) Right to have the debts of the firm settled out of the property of the firm When a firm is dissolved, the debts of the firm are settled out of the property of the firm, and if there is any surplus it is utilized towards the payment of the private debts of the partners. Similarly, the separate property of any partner (private estate) shall be applied first in the payment of his separate debts and surplus, if any, in the payment of debts of the firm (Section 49). (iv) To account for personal profits after dissolution In case of transactions by any surviving partner or by the representatives of a deceased partner undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up, he shall account for the profits he derives from such transactions and pay it to the firm. However, this rule will not apply in cases where any partner or his representative has bought the goodwill of the firm on its dissolution. [Section 16(a) and Section 50]. (v) Right to return of premium on premature dissolution (Section 51) Where a partner has paid a premium on entering into partnership for a fixed term and the firm is dissolved before the expiration of the term, he is entitled to repayment of the whole or part of the premium. However, no refund shall be paid to him if the dissolution a) Is due to the death of a partner b) Is due to the misconduct of the partner who has paid the premium or c) Is in the pursuance of an agreement which contains no provision for the refund of the premium. (vi) Right where partnership contract is rescinded for fraud or

misrepresentation (Section 52) Where partnership is rescinded on the ground of fraud or misrepresentation of one of the partners, the partner entitled to rescind has the following rights (a) Right to lien on the surplus assets He has a lien on the surplus assets after the debts of the firm have been paid, for any sum paid by him for the purchase of his share in the firm and for any capital contributed by him.

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(b) Right of subrogation If a partner pays off a creditor from his pocket, he steps into the shoes of that creditor and can claim money from the firm as that creditor. (c) Right to be indemnified He also has a right to be indemnified by the partners or partner guilty of fraud or misrepresentation against all the debts of the firm. (vii) Right to restrain from use of firm name or firm property (Section 53) After the firm is dissolved, every partner may restrain any other partner from carrying on a similar business in the firms name or from using any of the property of the form for his own benefit, until the affairs of the firm have been completely wound up, unless a partner has purchased the goodwill of the firm. The liabilities of a partner on dissolution are as under: (i) Liability for acts of partners done after dissolution Until public notice of dissolution of the firm is given, partners continue to be liable to third parties for any act done by any of them. However this liability does not apply to a partner who is dead or who is adjudged as insolvent or a sleeping partner. (ii) Continuing authority of partners for purpose of winding up After dissolution of a firm, the authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue, so far as may be necessary a) to wind up the affairs of the firm and b) To complete transactions began but unfinished, at the time of the dissolution. (iii) Liability to share profits earned after dissolution If any partner earns any profit from any transaction connected with the firm, after the dissolution, he must share it with the other partners and the legal representative of any deceased partner.

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